Indonesia’s economy has slowed in recent quarters, on the back of weaker domestic and foreign demand. Inflation has risen as fuel subsidies have been cut and the exchange rate has depreciated sharply, the rupiah being at its lowest level since March 2009. The current account has continued to deteriorate, due to weak trading-partner growth, declining terms of trade and structural impediments in a number of export sectors. Monetary policymakers have responded to higher inflation and the weak exchange rate with higher interest rates. While this has helped to defend the currency, it will also restrain economic growth. Economic policy in Indonesia has begun to focus on the vulnerability of the current account and debate is ongoing as regards measures to address it. This presentation starts by looking at the current economic climate in Indonesia, and then examines whether there is indeed an external imbalance problem – beyond just perceptions.

The current account balance is highly related to the country’s structural policies – In the case of Indonesia, the current account deficit is caused by both external factors (slowdown in major trading partners and significant decline in commodity prices) and domestic factors (high import growth in line with the vibrant domestic economic activity). At the same time, a current account deficit is a reasonable outcome for a country which is still at an early stage of development, but it should be (i) managed at a reasonable level, (ii) supported by adequate financing, and (iii) freed from structural problems such as the fuel subsidy regime or too much reliance on commodity-based exports. To manage the current account deficit at a reasonable and sustainable level, the Indonesian government and the relevant authorities have been and will be issuing a series of policy measures, both for short term and long term. This session will address the policy issues related to the current account balance, focusing on structural policies.

Lunch (12h30-14h00)

Session 3 (14h00-15h00): Polices for a sustainable current account deficit

Policy makers in Indonesia are considering measures to address a perceived weakness in the external balance. Economic theory suggests a number of possible approaches. The first set of policies are called “expenditure-switching” and are designed to change the relative prices of exports and imported goods and services, causing consumers to change the pattern of their spending. The second set of policies is called “expenditure-reducing” and these are designed to reduce aggregate demand and therefore lower the demand for imports. The third approach is to try to improve the supply-side of the economy through structural and industrial policies. This presentation looks at what each of these might entail for Indonesia and comments on the appropriateness of each approach in light of the policy advice that the OECD has been providing to Indonesia over recent years.

Indonesia’s position in global value chains reflects its comparative advantage in basic commodities and other upstream inputs, and its supply chains in manufacturing industries are relatively short. A more competitive manufacturing sector requires better connectivity to world markets and access to competitive services such as finance, engineering, transport, telecommunications and many more. Indonesia’s services sectors tend to be heavily regulated and market access for foreign services providers remains highly restricted. This presentation highlights Indonesia’s position in global value chains, the role of services for competitiveness in manufacturing and discusses the importance of services trade policy and trade facilitation reforms for competitiveness.

While it can be said that the Rupiah’s depreciation in 2013 was a result of the large and growing current account deficit, it is also important to assess the implication of potentially overvalued exchange rate on external performances. This is particularly relevant when currencies like the rupiah, which can be subject to “speculative appreciation” during euphoric periods or “risk-on” strategies by international investors. This presentation will look at valuation issues for the Rupiah, and its role in current account deterioration. It will also draw some conclusions from the recent depreciation on current account outlook and medium-term sustainability, and derive some questions to policy makers.